Thursday, May 29, 2008


When a tipping point is reached, there is simultaneous suffering and opportunity. A tipping point has been reached.

In the USA, the price of gasoline has finally bitten the butt of the American consumer. This bite is evidenced by the shut down of light truck factories, by the increased ridership of buses and by the huge decline in miles driven. The miles driven has fallen year over year since last November but the biggest ever recorded decline was reported in March. Aprils numbers are likely to be equally weak. Economist know that price cures price, but they never know the price it will take, until after the fact.


In the USA, the GDP per person is about $46,000 and the makeup of the GDP is .9% agriculture, 20.6% industrial and 78.5% service. The world average GDP per person is about $10,000 with GDP equal to 4% agriculture, 32% industrial and 45% service. These numbers show a lot and hide a lot. The USA is the most productive farming country in the world and yet farming is a very tiny portion of our total output. We are the capital goods industrial champion but industrial production is a small percentage relative to the rest of the world. The reason our Ag and industrial percentages are so small is because we can afford to stop at the Jiffy Lube and drink our Starbucks coffee on our way to the dentist. We earn 4.6 times the average income efficiently; thus we have the time to spend these earnings on services.

No less than 40% of the people of the world make their living in agriculture; they produce only 4% of the worlds GDP! In China, 43% of the people are employed in agriculture while 21.5 million of these farmers earn less than $100 per year. Only 20.5% of the people of the world are engaged in industrial production but due to automation industrial production represents 32% of the worlds economy. Contrary to popular belief, China has lost many more jobs to automation than has the USA.

The average person in the USA, who has been brainwashed by politicians, self serving businesses and the media, would be surprised to learn that the 40% of the people in the world, who work in the service industries, produce 64% of the worlds GDP. For years, the left tried to convince the American people that service jobs equate to flipping hamburgers at McDonald's. The numbers show that the high earners are more likely to be service workers, such as doctors, lawyers, surgeons, professors, teachers, dentist, nurses, sales representatives etc. While those 21.5 million Chinese who earn less than $100 per year in agriculture bring down the average, the average person in China earns double the amount of the average person in India. Even so, the average person in India is super rich relative to the average person in a few dozen other countries, including a major portion of Africa.


The poorest of the poor suffer in good times and bad but billions who climbed up on the bottom rung of the middle class ladder are now suffering. The lower middle class person might spend 70% of his income no food and fuel. The recent price spikes have caused many to do without heat or food.

The USA produces a dollars worth of GDP efficiently. We use less fuel per dollar of GDP than does labor intensive economies. Many developing countries have tried to insulate their people from oil price shocks by subsidizing fuel and imposing price controls. The result is wasted fuel. Any time the price of something is subsidized, too much of it is used. The more the use the greater the cost of the subsidy. The greater the cost, the greater the pressure to eliminate the subsidy. The distorted price causes ripples all the way around the world. The price of gasoline at your local pump is influenced by the wasteful use in Iran, India, China, etc.

As the fuel subsidies are reduced or eliminated, the people and economies of the developing nations will suffer. The demand for oil will decline. The world will approach recession but there will be modest relief at the gas pump.


Politicians on the left and right keep raising our taxes, again and again. Of course, they find ways to raise taxes without even saying the word tax. They find ways to raise taxes while doing there friends (lobbyist) favors. The sneaky ways used to raise taxes has caused our economic system to be distorted into a complicated scheme. Businesses in America face costly regulations each way they turn. They face an income tax code that is 10's of thousands of pages long. No two of a dozen professional tax preparers cannot produce the same results on the same small business return.

The ways of collecting taxes is virtually endless. The subsidy paid to farmers to not grow food is a tax on the rest of us. The proposed cap and trade system is a very expensive tax but it is presented as a way to solve an environmental problem. The same is true of CAFE auto mileage standards. The cost of the average car is increased by this legislation that is designed such that it protects big US auto companies. Restricting children to certain schools is a tax increase. Government run transportation or subsidized mass transit are tax increases. Regulations are put on foreign auto imports to make them expensive.

A friend tells me that the smartfortwo had to be re-engineered to make it one inch longer than the European model. Of course, this was a "safety feature". A 50 cent tariff was imposed on ethanol from Brazil to protect American farmers who have been paid 51 cents to produce an inferior ethanol.

The distortions to the economy are great. Americans drive 6,000 pound trucks to and from work because politicians are unwilling to bite the bullet and pass a simple tax. If politicians were truly willing to engage in "straight talk", they would replace a very long list of regulations and at least some portion of the income tax with a tax on gasoline consumption. The problem is that a simple fair tax system takes away power from the congress. They want and need to be lobbied.


We live in a country that sits on trillions of barrels of oil while we borrow money and fight wars to secure millions of barrels each day from half way around the world. We drive 6,000 pound vehicles to move our 200 pound plus out of shape bodies while we complain about fuel prices. We put the growing population of polar bears on a threaten species list while we put corn in our car engines and while millions of people cannot afford to buy corn to feed their families. We declare the breath of life for our plants and our oceans a pollutant while we pump out billions of tons of hazardous chemicals. We send 29 billion dollars worth of food to hungry people as a gift but refuse to pay them for the goods and services they are willing to provide. We blame Hispanics who were born in America, who have lived in America all their lives and who have served in our military for our problems. We burn trillions of tons of coal that is responsible for killing millions of people while we refuse to build nuclear power plants that would save us money and dramatically reduce the number of deaths.


The high price of gasoline has caused the people of the world to focus on what is right and wrong. Ethanol has lost much of its support. The wisdom of burning dirty coal is being questioned. The waste of subsidizing solar and windmills is becoming obvious. Nuclear power is not the whole answer. The free market is the answer. On average, the world is moving in the direction of economic freedom. Unfortunately, the push of the democrats is to move the USA in the other direction. The democrats will be foiled because the desire for freedom burns deep. Many Americans have died to preserve freedom. Americans are ill informed but they see what has happened to the price of food and fuel and they will not vote to expand this madness.

Ironically, the step toward the free market that is needed is to replace at least a portion of the income tax with a consumption tax. It remains to be seen if the American people are ready to make the kind of change that would allow the free market to solve our problems. If fuel consumption were taxed, we would find many ways to use less fuel. We would substitute every thing from mass transit to bicycles to pocket video for oil consumption. If income taxes were reduced we would find many ways to produce more income.

In the old days, we called the tipping point the clearing price. The tipping point or clearing price has been distorted by the actions of government. In the airline business, the small "suv jet" that uses a lot of fuel per passenger mile is subsidized by the government. Commercial passengers subsidize the billionaire travelers in private jets. Still, a tipping point has been reached. The revenue per passenger mile in commercial aircraft was 90 cents in 1938, 70 cents in 1972, 60 cents in 1978, 12 cents in 2005 and 13 cents in 2007. Only the largest and most fuel efficient aircraft makes economic sense today. Thousands of private jets are dinosaurs. The revenue per mile for the major airlines is headed up as a result of recent fare increases. In 2001 the average commercial flight produced 41 passenger miles per gallon of fuel. By 2006, this number had reached 49. Based on the recent high load factors and fare increases, this number is probably above 55 or 60. The typical car would need to carry at least 3 people to get that level of miles per gallon per passenger.


The BBC reports that inflation in Iran has soared to over 30%. The response of Amadenijhad has been to lower interest rates, to nationalize the banks into one big government bank and to continue to belligerently blame the US and Israel for its problems. The GDP per person in Iran had reached $12,000 in 2006. This was slightly above average, but the number was calculated using what is called purchasing power parity or PPP. The 30% inflation rate and a double digit unemployment rate means the standard of living is falling rapidly.

It takes a lot of mismanagement for such a resource rich and strategically located nation to suffer so much. The pertinent question is, "how much pain will the Iranian people suffer just so Amadenijhad can get his wish of acquiring nuclear weapons"? This week a long term rival of Amadenijhad, Larijani, was elected Speaker of Parliament. He has spoken out boldly about Amadenijhad's mishandling of the economy. Amadenijhad's days are numbered. A tipping point has been reached. He will come to terms with the UN Security Council, he will be replaced or his nuclear enrichment center will be torched. The third option is unlikely because the sanctions are working. The lowering of interest rates will increase inflation all the more. The protest marches are going to grow. The pressure will continue to build.


The world is well supplied with oil even though much Iranian oil is staying home. Little up to date information is available about Iranian oil. The latest information is that 30 million barrels have been stored in supertankers but those were filled a week ago. So far today, the oil price is down $2. US inventories will be announced at 10:30 this morning. The decline in world wide consumption is going to exceed the total amount supplied by Iran. The rest of the world is doing fine; it is Iran that needs to sue for peace!